All About Quality of Earnings Reports and How to Read Them

Summary

A routine but important step in the M&A financial due diligence process is securing a Quality of Earnings (QofE) report. Prepared independently in connection with an anticipated merger, acquisition, or divestiture, a well-executed QofE answers specific questions about the sustainability of earnings and insights into the underlying economic performance of the business.  Ultimately, it helps level any financial information differences between the buyer and seller.

Every QofE report is different, but they all include the same general categories, with information specific to the business and transaction.

What’s Inside

This article describes the key parts of most QofE reports and addresses these questions:

1. How is a QofE different from an audit?
2. What is the difference between Buy-side and Sell-side QofE reports?
3. What are the specific elements contained in most QofE reports?

Why it Matters

Understanding the elements of a QofE report helps buyers and sellers who may not be familiar with the steps in the mergers and acquisitions process. The information in a QofE report can be critical in successfully completing these complex financial transactions.